Get the most out of the tax subsidies for owning a home.

It's scandalous how rich are the tax breaks thrown at homeowners. They don't have to include in income the rental value of their property--their dividends, if you will, from owning--and capital gains are pretty much exempt, too. Instead of writing to your congressman to complain, however, we recommend that you milk these tax giveaways for all they're worth. Here are some subtleties relating to the capital gains exemption.

The basic rule: Gains from the sale of your principal residence--up to $250,000 for an individual and $500,000 for a couple--are tax free as long as you have lived in the house for two of the five years before the sale. Six years after this freebie was added to the tax code, the Internal Revenue Service is still tinkering with the details. In December it issued temporary rules covering when you can get a partial exclusion if you haven't lived in your home two years and final rules on other issues.

HOME OFFICE VICTORY

The IRS' final rules, unlike a preliminary 2000 version, allow you to escape tax on capital gains attributable to the part of your home you use as an office. However, you still have to pay tax--at a 25% rate--on any gain attributable to depreciation you claimed after May 6, 1997 on the home office portion of your house. Also, to be eligible for the principal-residence exclusion your home office has to be attached to your dwelling unit; it can't be a detached garage or barn. You can apply for a refund if if the new rules make you eligible for a break you didn't claim.

RELIEF FOR SHORT-TERMERS

The law says you can claim a pro rata share of the $250,000/$500,000 capital gains exclusion if you sell a home you've lived in for less than two years for reasons of health, a change in place of employment or "unforeseen circumstances." After one year, for example, a single taxpayer could claim a $125,000 exclusion and a couple, $250,000. What's an acceptable "unforeseen circumstance"? In the proposed rules, the IRS put death, divorce, job loss and multiple births on the list, but rejected pleas that it include bankruptcy or imprisonment. The IRS also expanded the health category to include moves you make to take care of a sick family member. As with the home office, you can apply for a refund--you have three years after filing a return to amend it.

DEADLINES FOR WIDOWS

If you've been recently widowed and you want to sell your home, how long do you have to claim the full $500,000 gains exemption for a couple? Only until the end of the calendar year in which your spouse died, the IRS decided. Another rule can soften the blow: If a couple owns a house jointly, the survivor inherits the deceased's half with a step-up to the market value at the date of death. In the nine states with community property laws, including California and Texas, the whole house gets stepped up, so there is no gain if the house is sold immediately.

MULTIPLE HOME GAINS

You can claim the $500,000 exclusion as often as every two years, and even if you claimed the pre-1997 one-time $125,000 capital gains exclusion for those age 55 and over. (Note: That old provision allowing rollover of gains is gone.) Say you own a rental home that you fully depreciated before May 1997. Sell your primary home, claim the $500,000 exclusion and then move into the rental property. After two years you can sell it and exclude another $500,000 in gain, without depreciation recapture.

SUBDIVISION DELIGHT

Do you have a house and an open lot next door that you've used as part of your yard? According to the new rules, if you sell the extra lot within two years before or after you sell your home, you can treat the land sale as part of the home sale and exclude its gains, too, up to a combined maximum of $500,000 per couple.

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